Developing a Smarter Network

Read WE 44 "Rethinking Energy"

Blockchain used to be synonymous with Bitcoin. Well, to the average person it probably still is the same thing. But this technology that we’re all hearing about—blockchain—is so much bigger than Bitcoin.  Its potential to automate, decentralize and democratize operations in any sector is almost limitless. Blockchain's unique advantage is trust. Existing networks rely on a central authority—the utility, independent energy service providers, the bank, the credit rating agency—to establish and transmit trust. Blockchain applications allow for decentralized trust, where verification comes from the consensus of multiple users. In the electricity sector, blockchain technology is promising to introduce data and automation to enable the movement toward much deeper decentralization and digitization of the electricity grid not to mention the democratization of the grid. Blockchain wants to give the power to the consumer (i.e. democratization)!

The grid which we utilize today to power our homes was designed more than a century ago. This century-old grid was designed to take centralized power located far away from load centers and deliver it to our homes and businesses. Big utilities had big power plants and used their long transmission lines to ensure that when you turned on your switch there was light. The consumer in this model is a captive ratepayer—unable to make decisions beyond paying the monthly bill and without timely information to change behavior or understand the impact of his/her consumption. For the past two or three decades, because of new technologies and new policies and the ever-increasing threat of climate change, we have an opportunity to re-think the way the grid is designed and the way it generates power and delivers power. We also have an opportunity to turn captive ratepayers into active consumers in charge of their own energy decisions.

The new energy paradigm is characteized by the rise of digitally enabled ecosystems, data-centric services and the emergence of a new agent: active consumers. It is evident also in the shift from centralized generation and vertically integrated monopolies (utilities) towards decentralization, digitalization, energy clusters, micro-grids, interconnection and diversification of supply and storage options. So, where does blockchain fit in this new energy paradigm and why should we care?

To answer this two-part question, let us start with smart grids and smart meters. Smart grids are the foundation for the transformation of the electric industry from a passive and reactive system to one that can seamlessly adapt new technologies and have the flexibility to accommodate decentralized power generation. By using today’s technology, a smart grid empowers consumers to manage their electricity use and save money, help utilities reliably deliver power, and exponentially increase the use of renewable generation. So, are we there yet? Is the grid a smart grid? Not really, because building a smarter grid has always been a journey. This journey has been going on since the grid was originally designed, but the term—smart grid—was coined a little over a decade ago and that’s because globally the shift toward renewable generation began to take shape. Renewable generation doesn’t have to be centralized and more often than not it is distributed throughout the grid (i.e., distributed energy resources or DER). A first step in this journey is to transition away from analog meters and onto smart meters. Smart meters give consumers daily if not hourly usage information; they allow for remote control, which opens up opportunities for demand response programs (i.e., shifting load from peak time to off-peak time) and energy efficiency gains. The journey from smart meters to a smarter grid continues as utilities introduce automation and better technologies to create a system that is more transparent and more open to accommodating distributed energy resources such as solar and wind that can be distributed throughout the system especially in residential units. A smarter grid journey continues until every home can be its own microgrid, i.e., capable of producing its own power to meet the demand of that household or maybe even produce enough power to sell back to the grid.

Where does blockchain technology fit in the smart grid journey? Let me provide a simple analogy that is similar in concept. Think of blockchain as a sophisticated database or better yet think of blockchain as Google Docs. Google Docs can be used by multiple authors in real time from different locations making it much easier and faster to modify a spreadsheet or power point presentation. All participants can see who made specific changes and when those alterations were done. The key additional feature with blockchain is the decentralization piece—so with Google docs, an attacker could take down the database through a single attack vector on the centralized store of information. With blockchain, because everyone has their own unique database copy, an attacker cannot alter the record in the same way.

As a distributed ledger technology (DLT), blockchain provides a platform for the management and transaction of high-value data. The use of blockchain technology similar to Google Docs allows all participants access and transparency. Blockchain by itself does not allow access to the electric grid, rather, it enables information exchange between participants in specified areas of the electricity market.  Blockchain is a way to verify the accuracy of data without the need for a central authority. So, blockchain is really a data management tool. Because it is a database without a central authority shared between every peer in a network, it provides real-time information and automatically verifies transactions with sophisticated encryption algorithms. The verification process ensures that all members can add to the blockchain, but no subsequent revisions are possible. This enables direct, trusted peer-to-peer transactions without an intermediary, such as a bank or utility.

A good example of using blockchain in the energy space is creating a digitized energy marketplace, able to include smaller DERs alongside incumbent utilities, and cater for a more cost competitive, transparent and modern energy system. Another excellent example of using blockchain in the energy space is a blockchain-powered renewable-energy certificate (RECs) platform. This platform powered by blockchain brings together renewable originators and buyers, with the goal of integrating more renewable sources of any size into the energy system in real time. Having an open-source, global blockchain infrastructure will encourage standardization across geographies, thereby enabling frictionless cross-border REC transactions.  Blockchain technology can record trade certificates, providing a reliable verification process - and all without the need for an expensive centralized management entity. 

Undoubtedly the area of blockchain application with the most hype surrounding it is peer-to-peer (P2P) trading. P2P is the “talk” of the sector—the prospects for blockchain technology to make transactive energy a reality, to upend the framework of the grid and the energy sector as we currently know it.  Smart contracts allow a blockchain to be programmed with a set of conditions that when met, automatically prompt transactions, enabling producers, consumers and prosumers all to participate into a sale process based on price, time, location and the type of energy source. With the right business model and the right regulatory framework, blockchain’s ability to make transactions faster, simpler and cheaper can allow for wider participation into the energy market, down to individual households.

The World Energy Council’s global survey of energy leaders—the Issues Monitor—identified blockchain as an open question, meaning that energy leaders from across the world were still figuring out what it meant for them and their businesses.  Consequently, the Council, in partnership with PwC, interviewed a number companies/organizations to understand the maturity of blockchain technology in energy and also to understand its potential and its impediments.  We interviewed companies pushing new business models, traditional oil and gas companies, regulators and utilities from across the globe to find out what is going on with all the blockchain hype.  We found the following:

- Technological feasibility and scalability are hurdles to be sure, but the market, or rather those interviewed for this study, were confident that with time, testing and refining of the technology these will be crossed.

- Blockchain in energy is in its infancy.  85% of those interviewed who had pilot projects said that they were in early stages and their pilots not mature yet

- Like many new initiatives in the energy world, the success of blockchain is very much dependent on a reframing of regulation and large-scale customer engagement, but that doesn’t mean blockchain cannot bring immediate optimization for the existing system. 

Blockchain in energy has the potential to upend the energy system that was created over a century ago, but it has a long way to go.  In the meantime, it is certainly pushing the envelope and forcing market players to innovate and create new business models to bring a cleaner, reliable and equitable energy system for everyone.

Regulation and customer engagement are key factors in how far blockchain can transform the electric grid.  While regulators will need to update rules and regulations to allow for a more distributed grid and more customer engagement, I would note that customer engagement may not be a requirement for all use cases and business models arising from the use of blockchain technology in the energy space. However, it is very much a necessity for a P2P market. A fully scaled P2P market is dependent on residential customers becoming prosumers. What the Council learned from the interviews with regulators, innovators and incumbents is this:

Regulators must clearly state their philosophy and long-term vision: The current regulation is defined for vertically integrated utilities. Regulators need to redefine policies so that they are suitable for and do not unintentionally constrain new business models enabling transactive energy systems. Defining a transition policy is a key first step to be taken.

The future outlook for energy blockchain is both highly promising and yet uncertain.

1 | Promising because it is fueling a rethinking of the energy value chain and accelerating a transition from energy as a commodity to energy as a service. 

2 | Uncertain because we don’t know how and whether the regulatory framework will change and adapt and will consumers engage. 

In my view, blockchain is another enabler toward an energy transition that is greener and increasingly less reliant on a centralized model. We are on the journey toward a smarter grid and technologies like blockchain will continue to shape this journey and dictate its pace, but regulation and customer engagement will ultimately decide their fate.

Read WE 44 "Rethinking Energy"

The author: Marzia Zafar

Maria Zafar is Director of Innovation and Insights at the World Energy Council (WEC). Formed in 1923, the Council is the UN-accredited global energy body, representing the entire energy spectrum, with more than 3000 member organizations located in over 90 countries.